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Atlantic View – More growth to come at Admiral as insurer shrugs off COVID

by John Woolfitt, Atlantic Capital Markets

More growth to come at Admiral as insurer shrugs off COVID

Fundamentals & Statement Summary

Insurance giant Admiral (ADM), who’s brands include Confused.com, Elephant.co.uk, Bell and Diamond, delivered a solid set of first half results on Wednesday morning. Although the results were impacted by the COVID crisis, which saw group turnover slip 4% to £1.69 billion largely as a result of the impact Admiral’s own Stay at Home premium refund, excluding this turnover actually increased by 2%. Customer numbers were 6% higher at 7.17 million, with the group share of pre-tax profits of £286.7 million & statutory PBT of £286.1 million, growing by 30% and 31% respectively, primarily as a result of strong prior year reserve releases in the UK and internationally and also some non-recurrence of negative items in 2019 including the £33 million Ogden discount rate impact (the rate used to calculate returns on investments for accident claimants who accept lump sum compensation. The amount claimants receive is adjusted according to the interest they can expect to earn by investing it).

UK Insurance recorded a 7% reduction in turnover to £1.25 billion due to the impact of the Stay at Home premium refund, with customer numbers growing to 5.58 million (30 June 2019: 5.32 million). Significant profit growth of £59.1 million in UK Insurance was recorded, primarily attributable to favourable development in prior year loss ratios for UK Motor, and higher investment income. Profit growth excluding the impact of the Ogden discount rate impact in H1 2019 (£33.3 million) was £25.8 million. UK Household profit improved in H1 2020 to £5.5 million (H1 2019: £4.2 million) despite bad weather which impacted the current period by around £5.3 million.

International Insurance businesses made a combined profit of £6.5 million (£2.7 million loss in H1 2019), with continued profit in the European operations and lower losses in the US. The combined International insurance turnover grew by 3% to £329.5 million (H1 2019: £319.5 million) and customer numbers by 10% to 1.49 million (30 June 2019: 1.36 million), both figures negatively impacted by the reduced demand in the early Covid lockdown period.

The Comparison result increased to £13.1 million from £7.4 million in H1 2019, mainly driven by a very strong first half from confused.com in the UK.

The Admiral Board declared an interim dividend of 70.5 pence, made up of a normal dividend of 55.0 pence per share and a special dividend of 15.5 pence per share, 12% higher than the 2019 interim dividend of 63.0 pence per share. The payment represents 85% of first half earnings.

CEO David Stevens commented: “A year ago I described our results as ‘frankly a bit dull’. With the benefit of hindsight there’s a lot to be said for ‘dull’ if the alternative is a global pandemic.”

“Our response to that pandemic highlighted two of Admiral’s key strengths – competent execution in the short term and sustainable values for the long term. We adapted quickly to the new circumstances, pirouetting from one working model to another and compressing years of learning and development into a matter of weeks through a phenomenal collective effort across the company at all levels. Alongside this adaptability, we also stayed true to our long-term commitment to balanced outcomes for all our stakeholders, notably through our £25 a vehicle ‘Stay at Home’ rebate.”

“This year’s interims benefit again from our consistently competent underwriting and conservative reserving on past years, feeding into another strong set of results in the core business and beyond. Thank you to all our staff, shareholders and customers who have made this possible.”

Chart and Technicals

Source: FactSet and Hargreaves Lansdown

The 2020 COVID19 crisis amounted to little more than a brief blip on the Admiral chart. Shareholders picking up the stock on the brief intraday low of 1,887p on March 12th will now be sitting on substantial gains, as ADM went on to recover the rising benchmark 200-day moving average just 5 days later. Since then the stock has continued to trade at the ‘top’ of the envelope, breaking out in early May and again at the start of April in the run up to the results statement. A peek at the 3 and 5 year charts shows a clear, upwardly mobile trading pattern, and despite the fact that ADM now trades at all time highs, the strong underlying performance and solid fundamentals provide solid support for continued growth and progress, particularly given the manner in which the stock shrugged off COVID. Our next target is based on the 3 year envelope projection, which points to an upper envelope target of 2,788p by October 2020.

Summary and Atlantic View

The manner in which Admiral literally shrugged the COVID crisis aside has clearly impressed the markets, with gains showing across the wider insurance sector as we publish this note. A gain in revenues and the general comparison result show an exceptionally strong performance across the board, despite the ‘stay at home’ premium rebate. The Atlantic team have long admired the stock: we view Admiral as a well run company with a ton of growth potential still waiting in the wings. Our view is clearly shared and underwritten by the Board, given the dividend hike declared with the results. Despite the fact that the shares now trade at all time highs, with Admiral, the trend is still very much your friend and we believe our target of 2,788p will be hit by October 2020. Atlantic rating: Buy.

To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here

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